MICROFINANCE HANDBOOK An Institutional  and Financial  Perspective

PART  I-ISSUES TO CONSIDER  WHEN  PROVIDING  MICROFINANCE  9Chapter  1  Understanding  the Country Context  11Suppliers  of Financial  Intermediation  Services  12Existing Microfinance  Providers  14What  Role Do Donors  Play in Microfinance?  1  6Financial  Sector Policies and Legal Enforcement  17Interest  Rate  Policies  1  8Government  Mandates  for Sectoral Credit  Allocations  19Legal Enforcement  of Financial  Contracts  19Financial  Sector  Regulation  and Supervision  20When Should MFIs Be  Subject  to Regulation?  21Considerations  When  Regulating MFIs  23Country  Approaches  to  Regulating MFls  25Economic  and  Social Policy Environment  26Economic  and  Political Stability  26Poverty Levels  28Investment  in Infrastructure  and Human  Resource Development  28Government  View  of the Microenterprise  Sectot  29Appendix  1. Risks in  the Microfinance  Industry  30Sources and Further  Readting  31Chapter 2  The  Target Market and  Impact Analysis  33Objectives  of  the Microfinance  Institution  33Direct and Indirect  Targeting  34The Importance of  Adequate  Cash Flow  and the Capacity  to Service  Debt  35vi Minimal  Equity Requirement  36Moral Hazard  36Market Size  36Identifying  the Target Market  37Characteristics  of the Population Group  37Types of Microenterprises  42Impact Analysis  46Kinds  of Impacts  47What Kinds  of Impacts Have We Seen  with Microfinance?  48Impact Proxies  49Client-Oriented  Impact Analysis  49When Should  Impact Be Assessed?  52Methods  of Impact Assessment  53Fundamental  Characteristics  of Qualitative  Approaches  53Fundamental  Characteristics  of Quantitative  Approaches  54Comparisons  of Quantitative  and Qualitative  Approaches  56Integrating  Methodologies  56The Choice  of Unit of  Analysis  56Appendix 1. Quantitative  Impact Assessment  58Sources  and Further Reading  59Chapter  3  Products  and Services  63The Systems  Framework  64Microfinance  Institutions-Minimalist  or Integrated?  65Financial  Intermediation  66Credit  66Savings  71Insurance  74Credit Cards and Smart Cards  74Payment  Services  75Social  Intermediation  76Enterprise  Development  Services  78Social  Services  81Appendix 1. Microfinance  Approaches  82Appendix  2. Matching  Enterprise Development  Services  to Demand  86Sources  and Further Reading  90Chapter  4  The Institution  93The  Importance  of Institutions  93Attributes  of a Good Institution  94The Importance  of Partner  Institutions  94Institutional Types  97Formal Financial  Institutions  97Semiformal  Financial  Institutions  101Informal  Financial  Providers  104Institutional Growth and Transformation  106Expansion  Within an Existing  Structure  106Creating  an Apex  Institution  106Creating  a Formal  Financial  Intermediary  109Governance  and Ownership  110Accessing  Capital Markets  113Institutional Capacity  Building  117Appendix  1. MFI Operational Review  118Appendix  2. Manual  for Elaboration  of a Business  Plan  123Sources  and Further Reading  128PART  II-DESIGNING  AND  MONITORING  FINANCiAL  PRODUCTS  AND  SERVICES  131Chapter 5  Designing  Lending  Products  133Cash Patterns,  Loan Terms, and Payment  Frequency  133Client Cash  Patterns and Loan  Amounts  133How Does  the Loan  Term Affect  the Borrower's  Ability  to Repay?  134Frequency  of Loan Payments  136Working Capital and Fixed  Asset  Loans  136Loan Collateral  137Collateral  Substitutes  137Alternative  Forms of Collateral  138Loan Pricing  138Calculating  Interest Rates  140How Do Fees  or Service  Charges  Affect  the Borrower  and the MFI?  142Cross-Subsidization  of Loans  143Calculating  Effective  Rates  143Estimating  the Effective  Rate  144Calculating  the Effective  Interest Rate with Compulsory  Savings  or Other Loan Variables  146Calculating  the Effective  Interest Rate with Varying  Cash Flows  147How Does  the Effective  Cost  for  the Borrower  Differ  from the Effective  Yield  to  the Lender?  148Appendix 1. How Can an MFI Set  a Sustainable  Rate on Its Loans?  149Appendix  2. Calculating  an Effective  Interest Rate  Using  the Internal Rate of Return Method  150Appendix  3. Calculating  the Effective  Rate  with Varying  Cash Flows  152Sources  and Further Reading  153Chapter 6  Designing  Savings Products  155Demand for Savings  Services  156Is There an Enabling  Environment?  157Legal  Requirements  for Offering  Voluntary  Savings  Services  157Deposit  Insurance  158Does  the MFI Have  the Necessary  Institutional Capacity  to Mobilize  Savings?  160Ownership  and Governance  160Organizational  Structure  160Human Resources  161Marketing  162Infrastructure  163Security  and Internal Controls  163Management  Information Systems  163Risk Management  and Treasury  163Sequencing  the Introduction of Savings  Services  164Types of Savings  Products  for Microentrepreneurs  164Liquid  Accounts  165Semiliquid  Accounts  165Fixed-Term  Deposits  166Costs of Mobilizing  Voluntary  Savings  166Pricing  Savings  Products  167Sources  and Further Reading  168Chapter  7  Management  Information  Systems  169An Overview  of Issues  Related  to Management  Information Systems  170Three  Areas  of Management  Information Systems  171Accounting  Systems  171Credit  and Savings  Monitoring Systems  172Client  Impact Tracking  Systems  178Installing  a Management  Information System  178Institutional  Assessment  178Configuration  178Software  Modifications  179Testing  179Data Transfer  179Training  180Parallel  Operations  180Ongoing Support  and Maintenance  180Appendix 1. Overview  of Commercial Management  Information System  Software  Packages  180Appendix  2.  Criteria  for Evaluating  Loan  Tracking  Software  183Sources  and Further Reading  183PART  III-MEASURING  PERFORMANCE  AND MANAGING VLABILITY  185Chapter  8  Adjusting  Financial  Statements  187Accounting  Adjustments  188Accounting  for Loan Losses  188Accounting  for Depreciation  of Fixed  Assets  192Accounting  for Accrued  Interest  and Accrued  Interest Expense  193Adjusting  for Subsidies  and  Inflation  194Accounting  for Subsidies  195Accounting  for Inflation  197Restating  Financial  Statements  in Constant Currency  Terms  199Appendix 1. Sample  Financial  Statements  Adjusted  for Subsidies  200Appendix  2.  Sample  Financial  Statements  Adjusted  for Inflation  202Sources  and Further Reading  204Chapter  9  Performance  Indicators  205Portfolio Quality  206Repayment  Rates  206Portfolio  Quality Ratios  207Loan Loss  Ratios  211Productivity  and Efficiency  Ratios  212Productivity  Ratios  212Efficiency  Ratios  213Financial  Viability  215Financial  Spread  216Two Levels  of Self-Sufficiency  216Subsidy Dependence  Index  218Profitability  Ratios  220Return on Assets  Ratio  221Return on Business  Ratio  222Return on Equity Ratio  223Leverage  and Capital Adequacy  223Leverage  224Capital Adequacy  Standards  224Scale  and Depth of Outreach Indicators  225Performance  Standards  and Variations  227Appendix 1. Sample  Balance  Sheet  233Appendix  2. Sample  Income Statement  234Appendix  3. Sample  Portfolio Report  235Appendix  4. Adjusted  Sample  Financial  Statements  (Combined) Appendix 5. Analyzing  an MFI's Return on Assets  238Sources  and Further Reading  241Chapter  10 Performance  Management  243Delinquency  Management  243The Effect  of Delinquency  on an MFI's Profitability  244Controlling Delinquency  245Rescheduling  or Refinancing  Loans  246Productivity  and Efficiency  Management  248Improving  Staff  Productivity  248Managing Costs  251Risk Management  254Asset  and Liability  Management  254Operating Risk Management  258Appendix 1. Gap Analysis  260Sources  and Further Reading  261GLossARY  263INDEX  271